RWE "hold"

17.08.06 - AC Research

LONDON, August 17 (newratings.com) - Analyst Henning Wagener of AC Research reiterates his "hold" rating on RWE (RWE-EUR).

According to AC Research?s research note dated August 16 and published this morning, the company has reported its 1H06 earnings results. RWE was able to grow external sales by 17% y/y to ?24.331 billion. Here, apart from price increases for electric power, gas, and water, the company also benefited from certain positive quantity effects in the gas segment. While EBITDA was up 14% to ?5.072 billion, operating profits climbed 19% to ?4.104 billion. With a growth rate of 29%, the power generating subsidiary of RWE Power contributed the most to the substantial increase in operating profits. The RWE Energy segment recorded a growth rate of 19%. The analyst says, however, that due to a number of effects with respect to consolidation and accounting, operating results in the water segment dropped 10%. Finally, net profits on corporate level were up 16%, climbing to ?1.659 billion, or ?2.95 per share.

In all, RWE?s results were marginally ahead of the estimates. For the full year of 2006, the company continues to expect 5%-10% growth in operating results. As far as net profits are concerned, expectations remain at the lower limit of the previously guided 10%-20% margins. This should be attributed to an adjustment in earnigns forecasts with respect to the operating results of RWE Energy and the water segment, AC Research mentions. The water segment is being adversely impacted by the costs associated with the preparation of the segment?s scheduled sale. Moreover, the company?s non-operating is likely to be slightly better than previously planned.

At the current share price of ?73 and a 2007 P/E ratio of roughly 14, the company?s stock seems to keep a rather fair rating, the analyst says. Basically, there are two factors of uncertainty for RWE?s business going ahead, according to AC Research. For one thing, the water segment is giving some cause for concern. RWE plans to sell its British subsidiary Thames Water. The sale of the water segment shall be completed by 2007. Another factor of uncertainty may be a certain additional exposure for operations in connection with the progressing regulation on the German energy market, the analyst adds.

AC Research reiterates its "hold" rating on RWE.